Short Summary
How much flexibility should firms have to depart from collectively negotiated wages and working conditions? The experiences of Germany and Italy show both the benefits and the risks of decentralizing collective bargaining.
From the mid-1990s to the mid-2000s, Germany’s collective bargaining system became substantially more flexible, in particular through the spread of so-called “opening clauses.” These clauses allowed firms, in agreement with worker representatives, to deviate from industry-level agreements on wages, working hours, and other conditions when firms faced economic difficulties. Together with declining collective bargaining coverage and firms opting out of collective bargaining, this created substantial scope for wage adjustment within an otherwise centralized bargaining system. The resulting wage moderation contributed to Germany’s improved competitiveness and its transformation from the “sick man of Europe” into a highly competitive export economy.
Italy followed a very different path. National collective agreements remained considerably more rigid, giving individual firms little scope to negotiate wages below nationally agreed floors. Rather than gaining flexibility within the existing system, some firms found ways around it. New evidence on firms opting out of national agreements shows that this flexibility can help preserve jobs, but only under certain conditions. In Northern Italy’s more competitive labor markets, lower wages are accompanied by greater employment stability. In the South, where employers have greater wage-setting power, wage losses are much larger and bring no corresponding employment gains.
The comparison highlights a central trade-off. Collective bargaining can constrain firms when they need to adjust in response to adverse shocks, but it also protects workers against employer wage-setting power and allows them to realize wage gains when business conditions improve again. The challenge is therefore not simply to make wage setting more flexible, but to combine sufficient flexibility for firms with effective wage protection for workers.
Key Findings
- Germany created flexibility within collective bargaining. From the mid-1990s to the mid-2000s, “opening clauses” spread rapidly, allowing firms to deviate from industry-level agreements on wages and working conditions. Together with declining bargaining coverage, this decentralization contributed to wage moderation and Germany’s improved international competitiveness. In the 2010s, workers in Germany’s manufacturing industries experienced notable wage increases in return.
- Italian firms have instead sought flexibility by opting out of national agreements. Workers affected by these opt-outs experience persistent wage losses of 2–3%, but are 3–4 percentage points more likely to remain employed, largely because they are less likely to separate from the opting-out firm.
- Whether workers benefit from greater flexibility depends on local labor market conditions. In the more competitive labor markets of Northern Italy, greater employment stability broadly compensates for lower wages. In the South of Italy, where employers have more wage-setting power, wage losses are larger and bring no corresponding employment gains.
- Decentralization therefore involves a trade-off between flexibility and worker protection. Collectively negotiated wage floors can constrain firms’ ability to adjust labor costs, but they also protect workers against employer wage-setting power. As collective bargaining coverage has declined, especially among low-paid German workers, the statutory minimum wage introduced in 2015 in response to increasing wage inequality in the lower tail of the wage distribution has increasingly provided a wage floor outside the collective bargaining system.
Relevance Today
European governments continue to debate how to make collective bargaining more responsive to firm and local conditions without weakening worker protection, particularly where employers have greater power to set wages. “Coordinated decentralization,” which allows firms to deviate from national agreements, has been proposed as a solution (OECD, 2019). Germany’s experience from the mid-1990s to the mid-2000s shows how decentralization within the collective bargaining system can facilitate wage adjustment and improve competitiveness. More recent Italian evidence shows that such flexibility can also prevent job losses, but its effects depend critically on local labor market conditions. Where employers hold wage-setting power, centralized wage floors remain a valuable protection for workers.
Author Quote
“Germany showed that collective bargaining can remain protective while giving firms room to adjust when they come under pressure. Italy shows the other side: flexibility can preserve jobs where wage floors constrain firms, but where employers have substantial wage-setting power, removing those floors mainly means lower wages for workers. The challenge is to provide flexibility where it is needed without giving up the protection collective bargaining provides.”
Reference: Opting Out of Centralized Collective Bargaining: Evidence from Italy, RFBerlin Discussion Paper No. 43/25;
Collective Bargaining in Germany: Trends and Challenges, RFBerlin Discussion Paper No. 187/26;
From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy, Journal of Economic Perspectives, 2014, 28 (1), 167–188.
Research Summary
How much flexibility can a centralized wage-setting system afford before it stops protecting workers? And does the answer depend on local market structure? Germany and Italy offer a useful pair of cases: both countries rely heavily on collective bargaining, display large regional differences in productivity, and have faced mounting pressure towards a more decentralized system. Germany’s experience from the mid-1990s to the mid-2000s illustrates how decentralization can take place gradually from within the existing bargaining system. Italy’s more recent experience shows what can happen when a formally centralized system remains rigid and firms instead find ways around it. Drawing on these episodes and our recent work, we argue that wage-setting flexibility can benefit firms and help preserve jobs, but that its consequences depend critically on how much competition employers face for workers.
The trade-off at the heart of collective bargaining
In most European countries, employer associations and unions negotiate agreements setting minimum pay and working conditions at the national or sectoral level. These agreements guarantee comparable conditions across regions and firms. The same uniformity, however, can become a constraint: firms hit by adverse shocks cannot lower labor costs and may reduce employment instead; similarly, firms in less productive regions may find national wage floors too high to sustain employment at all. This tension is central to a long debate on the optimal degree of centralization in wage bargaining (Calmfors and Driffill, 1988), and it motivated the OECD’s (2019) proposal of “coordinated decentralization”: national frameworks setting broad standards while allowing firms to negotiate directly with their workforce.
Germany: flexibility from within the system
Germany provides an important example of decentralization taking place within an existing system of sectoral collective bargaining. Dustmann, Fitzenberger, Schönberg and Spitz-Oener (2014) study a particular historical episode: the period from the mid-1990s to the mid-2000s, when Germany moved from being regarded as the “sick man of Europe” towards becoming again a highly competitive export economy. Their argument is not a general account of Germany’s subsequent economic performance. Rather, they show that the improvement in German competitiveness during this period coincided with a profound change in the way collective bargaining operated. The formal architecture of industry-level bargaining changed relatively little, but bargaining became substantially more decentralized. Firms increasingly negotiated arrangements outside sectoral agreements. At the same time, industry agreements increasingly incorporated opening clauses. These allowed firms and worker representatives to deviate from collectively negotiated standards on wages, hours, and other working conditions, including through productivity-enhancing organizational changes. Fewer than 5% of manufacturing agreements contained wage opening clauses in 1995; by 2004 the share was about 60%. Dustmann et al. (2014) link this decentralization to the wage moderation and rising wage inequality that characterized Germany over this period. Real wages declined particularly at the bottom of the wage distribution, while German unit labor costs grew much more slowly than those of its main trading partners. Importantly, this adjustment began well before the Hartz labor-market reforms of the early 2000s and was an important component of Germany’s recovery in international competitiveness.
The paper therefore challenges the popular interpretation that Schröder’s Hartz reforms were the main reason for Germany’s export miracle. Rather, Germany’s success came from an unusual degree of flexibility within apparently rigid labor-market institutions. Germany’s unions, employer associations and works councils allowed wage determination to become increasingly localized in response to competitive pressures.
Italy: flexibility through the back door
Italy’s system has been considerably more rigid. National sectoral agreements set wage floors for each job title and apply to all workers in the sector, whether or not they belong to the signing union, placing Italy at the top of OECD countries for bargaining coverage. Firm-level agreements may typically only improve on national terms, never fall below them. Boeri, Ichino, Moretti and Posch (2021) document the consequences: Italian nominal wages respond to local productivity much less than German wages, and non-employment in low-productivity provinces is correspondingly much higher.
The contrast with Germany was apparent to Italian employers themselves. During Fiat’s industrial-relations conflict in 2010–11, CEO Sergio Marchionne demanded greater scope to adjust working arrangements at the firm level, arguing that greater plant utilization and productivity would ultimately allow Fiat to pay wages comparable to those in Germany and France (Mauro, 2011). Germany was explicitly invoked in the Italian debate as a model for combining high wages with greater firm-level flexibility (Reuters, 2010). Confindustria president Emma Marcegaglia described Germany as “an example worth looking at,” referring specifically to arrangements that allowed German firms greater scope to depart from sectoral agreements (Picchio, 2011). Fiat, however, judged Italy’s existing bargaining structure unable to provide the flexibility it sought. At its large Pomigliano and Mirafiori plants, it therefore pursued a different route, moving outside the established national agreement (Mauro, 2011; Picchio, 2011).
Fiat’s confrontation with the established bargaining system foreshadowed a broader development. Rather than adjusting the system from within, as Germany had done through opening clauses and other forms of decentralized bargaining, Italian firms increasingly found ways around it. A recent study of two such episodes (Dustmann, Giannetto, Incoronato, Lacava, Pezone, Saggio and Schoefer, 2025) examines the 2011 secession of a group of large retailers from their employer association and the wider adoption of “pirate” agreements: contracts signed with small unions setting lower wage floors and more flexible conditions.
Winners and losers from opting out
The findings are remarkably consistent across the two episodes. Workers whose employers opt out experience persistent wage losses of 2–3% relative to comparable workers. At the same time, their employment stability improves: they are 3–4 percentage points more likely to remain employed, largely because they are less likely to separate from the opting-out firm. On average, these two effects roughly offset each other, leaving workers’ total earnings broadly unchanged or slightly lower. Firms, meanwhile, reduce their wage bill by 3-4% and become more likely to remain in business.
These average effects, however, conceal a striking regional divide. In the more productive and more competitive North, greater employment stability broadly compensates workers for their wage losses: opting out lowers wages but also reduces the risk of job loss. In the South, by contrast, wage losses are about three times larger and are not accompanied by improved employment stability. Workers therefore experience an unambiguous loss in total earnings. The same flexibility that appears to help preserve employment in the North thus primarily translates into lower wages in the South without gains in employment stability.
The role of employer power
A possible explanation lies in the competition employers face for workers. Where a worker can plausibly move elsewhere, a firm that lowers pay too far will lose staff; there, the wage floor genuinely restricted employment, and removing it allows firms to preserve or expand jobs. Where alternatives are scarce, as in much of Southern Italy, employers can reduce pay without strong consequences on employment. There, the floor was not an obstacle to hiring, but a limit on employers’ wage-setting power, and removing it transfers income from workers to firms rather than creating jobs.
Germany today: the limits of decentralization
The subsequent evolution of German collective bargaining raises different questions. As Bellmann, Dustmann and Fitzenberger (2026) show, formal collective bargaining coverage continued to decline well beyond the period studied by Dustmann et al. (2014). This erosion has been uneven: among the lowest-paid full-time workers, coverage stood at 34% in 2021, compared with 62% in the middle of the wage distribution. The earlier German episode therefore illustrates the potential benefits of flexibility within collective bargaining, while the more recent decline in coverage highlights a different risk: workers may lose the protection of collectively negotiated wage floors altogether. This is particularly consequential at the bottom of the wage distribution, where employer wage-setting power likely matters most.
Germany’s introduction of a statutory minimum wage in 2015 (Dustmann, Lindner, Schönberg, Umkehrer and vom Berge, 2022) can be viewed partly as a response to this erosion of wage-setting institutions at the bottom of the distribution. The minimum wage restored a wage floor for workers who were increasingly no longer covered by collective agreements. But it is a less flexible instrument than the collective bargaining system that had evolved in Germany during the 1990s and early 2000s. That system combined collectively negotiated wage floors with scope for firms to adjust wages and working conditions when facing severe competitive pressures. As collective bargaining coverage has declined, some of that flexibility has been replaced by the more uniform protection of a statutory wage floor.
Lessons for policy
Collective bargaining decentralization can give firms a margin of adjustment they would otherwise lack. Germany’s experience from the mid-1990s to the mid-2000s illustrates how greater flexibility within an existing bargaining system can facilitate wage adjustment and contribute to improved competitiveness. The Italian evidence identifies the underlying employment trade-off more directly. Where national wage floors constrain firms’ ability to adjust labor costs, greater wage-setting flexibility can help preserve jobs. Where employers hold substantial wage-setting power, however, those floors serve a different function: they limit how far wages can be marked down. Removing them then leads primarily to lower wages rather than higher employment, redistributing income from workers to firms. A uniform right to opt out can therefore have very different consequences across a country such as Italy, where productivity and labor market competition vary substantially across regions.
Conclusion
The experiences of Germany and Italy illustrate both the benefits and the limits of decentralizing collective bargaining. Germany’s experience from the mid-1990s to the mid-2000s shows that a centralized bargaining system can accommodate substantial firm-level flexibility. This helped wages and working conditions adjust to competitive pressures without dismantling the broader collective bargaining framework. Italy’s experience shows more directly why such flexibility can be valuable: where nationally negotiated wage floors constrain firms, allowing wages to adjust can help preserve employment.
But flexibility comes with a trade-off. Collective agreements do not only constrain firms; they also protect workers against employers’ wage-setting power. The Italian evidence shows that where labor markets are less competitive, removing collectively negotiated wage floors produces substantially larger wage losses without corresponding employment gains. In such settings, decentralization primarily shifts income from workers to firms.
The policy challenge is therefore not simply to choose between centralized and decentralized wage setting. It is to design institutions that preserve the capacity of firms to adjust when collectively negotiated standards become genuinely constraining, while maintaining effective wage floors where workers have limited outside options or lack the individual bargaining power to realize wage increases when business conditions have improved. Germany’s earlier system of coordinated decentralization came close to achieving this balance. Its more recent experience also illustrates how difficult that balance is to maintain: as collective bargaining coverage has eroded, particularly among low-wage workers, Germany has increasingly relied on a statutory minimum wage to provide the protection once supplied by collective agreements. The central lesson from both countries is therefore that flexibility and worker protection are complements that need to be balanced, rather than alternatives from which policymakers can simply choose.
References
Bellmann, Lutz, Christian Dustmann, and Bernd Fitzenberger, “Collective Bargaining in Germany: Trends and Challenges,” RFBerlin Discussion Paper, 2026, No. 187/26 (forthcoming in Industrial Relations).
Boeri, Tito, Andrea Ichino, Enrico Moretti, and Johanna Posch, “Wage Equalization and Regional Misallocation: Evidence from Italian and German Provinces,” Journal of the European Economic Association, 2021, 19 (6), 3249–3292.
Calmfors, Lars, and John Driffill, “Bargaining Structure, Corporatism and Macroeconomic Performance,” Economic Policy, 1988, 3 (6), 14–61.
Dustmann, Christian, Bernd Fitzenberger, Uta Schönberg, and Alexandra Spitz-Oener, “From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy,” Journal of Economic Perspectives, 2014, 28 (1), 167–188.
Dustmann, Christian, Attila Lindner, Uta Schönberg, Matthias Umkehrer, and Philipp vom Berge, “Reallocation Effects of the Minimum Wage,” The Quarterly Journal of Economics, 2022, 137 (1), 267–328.
Dustmann, Christian, Chiara Giannetto, Lorenzo Incoronato, Chiara Lacava, Vincenzo Pezone, Raffaele Saggio, and Benjamin Schoefer, “Opting Out of Centralized Collective Bargaining: Evidence from Italy,” RFBerlin Discussion Paper, 2025, No. 43/25.
Mauro, Ezio, “La mia sfida per la nuova Fiat: salari tedeschi e azioni agli operai,” La Repubblica, January 18, 2011 (link).
OECD, “Negotiating Our Way Up,” 2019.
Picchio, Nicoletta, “Intervista a Marcegaglia: vince la nostra strategia, ora Fiat ha le condizioni per investire,” Il Sole 24 Ore, January 16, 2011 (link).
Reuters, “Fiat Unions Look at Germany for New Contract Model,” September 20, 2010 (link).
